Zhongfu Straits (Pingtan) Development Company Limited (SZSE:000592) shares have continued their recent momentum with a 43% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 4.3% isn't as attractive.

After such a large jump in price, when almost half of the companies in China's Forestry industry have price-to-sales ratios (or "P/S") below 1.6x, you may consider Zhongfu Straits (Pingtan) Development as a stock probably not worth researching with its 3.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

What Does Zhongfu Straits (Pingtan) Development's P/S Mean For Shareholders?

Revenue has risen firmly for Zhongfu Straits (Pingtan) Development recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Zhongfu Straits (Pingtan) Development?

In order to justify its P/S ratio, Zhongfu Straits (Pingtan) Development would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 24%. Still, revenue has fallen 6.9% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 16% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Zhongfu Straits (Pingtan) Development's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Zhongfu Straits (Pingtan) Development's P/S?

The large bounce in Zhongfu Straits (Pingtan) Development's shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Zhongfu Straits (Pingtan) Development currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You always need to take note of risks, for example - Zhongfu Straits (Pingtan) Development has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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